132 summer 2004

Does the Japanese propensity to save make stimulating their economy difficult?

Equations

Could we have done our analysis using equations instead of diagrams?

]]> You bet. Equations are especially useful if the problem is more complex because adding variables is a lot easier than adding dimensions to the chalkboard. Plus, it is helpful to use numerical estimates of the slopes.

The technology for using M, G, and T to control the economy is similar to the technology for using thruster rockets to control a spacecraft. In the 1960's we learned to land a rocket on the moon (or the other side of the Earth).

Unfortunately, economists' effort to "fine tune" the economy were somewhat less successful than the NASA missions.

Real Business Cycles

Criticisms of Keynesian Models

Midterm 2 Answers

Supply and Demand for Money

Transactions Demand for Money

Money Supply

Q & A for Midterm 2

The Unemployment Rate

The definition of the unemployment rate is certainly not without its difficulties. People can work 1 hour in a week and be "employed". People can either actively seek employment or not and be in and out of the labor force.

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How to Prepare an Exam

Monetarism

Milton Friedman and the monetarists emphasize the importance of monetary policy in influencing business cycles.

]]> The textbook does a much better job of printing these points.

A Big Point

Keynesian models explain how we can be in a stable equilibrium without being at full employment. The equilibrium level of output will determined the equilibrium amount of labor hired, which may be less than the labor supply.

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Crowding Out

While increased government spending stimulates the economy in the short run in a Keynesian model, the long run effect could be negative if the increased government borrowing results in less investment.

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Keynesian Aggregate Supply

The Keynesian's needed an aggregate supply curve plus they needed to address address the issues raised by persistent unemployment.

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Recall the classical view:

Suppose we reorganize this diagram by putting the wage rate on the vertical axis and incorporating the price level into the demand for labor.

If the nominal wage rate is somehow fixed and the demand for labor is to the right, we can get labor hired determined entirely by demand.

The following diagram is an attempt to explain how we could get into this disequilibrium if the price level falls, the wage rate does not, and workers' labor supply is based on the old price level.

Is the version from the book clearer?

We can also get an upward sloping AS curve if labor supply is based on sluggish price expectations.

The rational expectations theory says that workers are not that naive. If their price expectations are "rational", we can be right back to the classical outcome.

Midterm 1 Answers

Aggregate Demand / Aggregate Supply

The Keynesian aggregate demand curve is obtained by considering different price levels for a fixed money supply. Changing G, T, or M then shifts the AD curve.

The AS/AD diagram's implications depend on the slope of the aggregate supply curve.

An upward sloping AS curve plus a shifting Keynesian AD curve implies something similar to a Phillips Curve:

A shifting classical AS curve has distinctly different implications for the relationship between inflation and unemployment.